Monday, November 22, 2010

9 The percentage of the labor force that used computers increased at a faster rate in the 1980s than in the 1990s, but it wasn’t until the mid-to-late late ‘90s that a majority of workers used computers.

Overall, pre-tax income increased 1.42 percent annually for the 20th percentile (poor and lowermiddle-class people) and 2 percent annually for the 95th percentile (upper-middle-class and rich people). The White House during this period was occupied by five Democrats (Truman, Kennedy, Johnson, Carter, Clinton) and six Republicans (Eisenhower, Nixon, Ford, Reagan, Bush I, Bush II). Bartels plotted out what the inequality trend would have been had only Democrats been president. He also plotted out what the trend would be had only Republicans been president.on politics," Hacker and Pierson point out in their new book, Winner-Take-All Politics, "only a fairly small fraction is directly connected to electoral contests. The bulk of it goes to lobbying…." Corporations now spend more than $3 billion annually on lobbying, according to official records cited by Hacker and Pierson (which, they note, understate true expenditures). That's nearly twice what corporations spent a decade ago.

Until recently, the consensus among academics—even most liberal ones—was quite different. Economists argued that the Great Divergence was the result not of Washington policymaking but of larger "exogenous" (external) and "secular" (long-term) forces. In June, the Congressional Budget Office calculated that spending by the federal government made up 23 percent of U.S. gross domestic product, after averaging 18.5 percent during the previous four decades. But even with federal spending at this unusually high level (necessitated by a severe recession), Washington's nut remains less than one-quarter the size of the economy. Most of that nut is automatic "entitlement" spending over which Washington policymakers seldom exert much control. Brad DeLong, a liberal economist at Berkeley, expressed the prevailing view in 2006: "[T]he shifts in income inequality seem to me to be too big to be associated with anything the government does or did."

My Slate colleague Mickey Kaus took this argument one step further in his 1992 book The End of Equality, positing that income inequality was the inevitable outgrowth of ever-more-ruthlessly efficient markets, and that government attempts to reverse it were certain to fail. "[Y]ou cannot

decide to keep all the nice parts of capitalism," he wrote, "and get rid of all the nasty ones." Instead, Kaus urged liberals to combat social inequality by nurturing egalitarian civic institutions (parks, schools, libraries, museums) and by creating some new ones (national health care, national service, a revived WPA) that remove many of life's most important activities from the

"money sphere" altogether.

Finding ways to increase social equality is an important goal, and Kaus's book remains a smart and provocative read. But the academic consensus that underlay Kaus's argument (and Long's more modest one) has lately started to crumble.

Economists and political scientists previously resisted blaming the Great Divergence on government mainly because it didn't show up when you looked at the changing distribution of federal income taxes. Taxation is the most logical government activity to focus on, because it is literally redistribution: taking money from one group of people (through taxes) and handing it

over to another group (through government benefits and appropriations).

Another compelling reason to focus on taxation is that income-tax policy has changed very dramatically during the last 30 years. Before Ronald Reagan's election in 1980, the top income tax bracket stood at or above 70 percent, where it had been since the Great Depression. (In the

Compression, as the economy boomed and income inequality dwindled, the top bracket resided at a level that even most Democrats would today call confiscatory. Reagan dropped the top bracket from 70 percent to 50 percent, and eventually pushed it all the way down to 28 percent. Since then, it has hovered between 30 percent and 40 percent. If President Obama lets George

W. Bush's 2001 tax cut expire for families earning more than $250,000, as he's expected to do, Tea Partiers will call him a Bolshevik. But at a whisker under 40 percent (up from 35), the top bracket would remain 30 to 50 percentage points below what it was under Presidents Eisenhower, Nixon, and Ford. That's how much Reagan changed the debate.

But tax brackets, including the top one, tell you only the marginal tax rate, i.e., the rate on the last dollar earned. The percentage of total income that you actually pay in taxes is known as theeffective tax rate. That calculation looks at income taxed at various rates as you move from one

bracket to the next; it figures in taxes on capital gains and pensions; it figures in "imputed taxes" such as corporate and payroll taxes paid by your employer (on the theory that if your boss didn't give this money to Uncle Sam he'd give it to you); and it removes from the total any money the

federal government paid you in Social Security, welfare, unemployment benefits, or some other benefit. Reagan lowered top marginal tax rates a lot, but he lowered top effective tax rates much less—and certainly not enough to make income-tax policy a major cause of the Great Divergence.

In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent, according to the Congressional Budget Office. By Reagan's last year in office it was 32.2 percent. From 1989 to 2005 (the last year for which data are available), as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most

years it remained in the low 30s, surging to 41 during Clinton's first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would

increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent.

Measuring tax impacts is not an exact science. There are many ways to define rich, poor, and middle class, and many variables to consider. Some experts have looked at the same data and concluded that effective tax rates have gone up slightly for people at high incomes. Others concluded they've gone down. The larger point is that you can't really demonstrate that U.S. tax

policy had a large impact on the three-decade income inequality trend one way or the other. The inequality trend for pre-tax income during this period was much more dramatic. That's why academics concluded that government policy didn't affect U.S. income distribution very much.

But in recent years a few prominent economists and political scientists have suggested looking at the question somewhat differently. Rather than consider only effective tax rates, they recommend that we look at what MIT economists Frank Levy and Peter Temin call "institutions and norms."

It's somewhat vague phrase, but in practice what it mostly means is "stuff the government did, or didn't do, in more ways than we can count." In his 2007 book, The Conscience of a Liberal, Princeton economist and New York Times columnist Paul Krugman concludes that there is "a strong circumstantial case for believing that institutions and norms … are the big sources of rising inequality in the United States." Krugman elaborated in his New York Times blog:

[T]he great reduction of inequality that created middle-class America between 1935 and

1945 was driven by political change; I believe that politics has also played an important

role in rising inequality since the 1970s. It's important to know that no other advanced

economy has seen a comparable surge in inequality.

Proponents of this theory tend to make their case not by measuring the precise impact of each thing government has done but rather by charting strong correlations between economic trends and political ones. In his 2008 book Unequal Democracy, Larry Bartels, a Princeton political scientist, writes:

[T]he narrowly economic focus of most previous studies of inequality has caused them to

miss what may be the most important single influence on the changing U.S. income

distribution over the past half-century—the contrasting policy choices of Democratic and

Republican presidents. Under Republican administrations, real income growth for the

lower- and middle-classes has consistently lagged well behind the income growth rate for

the rich—and well behind the income growth rate for the lower and middle classes

themselves under Democratic administrations.

Bartels came to this conclusion by looking at average annual pre-tax income growth (corrected for inflation) for the years 1948 to 2005, a period encompassing much of the egalitarian Great Compression and all of the inegalitarian Great Divergence (up until the time he did his research).

Bartels broke down the data according to income percentile and whether the president was a Democrat or a Republican. Figuring the effects of White House policies were best measured on a one-year lag, Bartels eliminated each president's first year in office and substituted the year following departure. Here is what he found:

In Democrat-world, pre-tax income increased 2.64 percent annually for the poor and lowermiddle-class and 2.12 percent annually for the upper-middle-class and rich. There was no Great Divergence. Instead, the Great Compression—the egalitarian income trend that prevailed through the 1940s, 1950s, and 1960s—continued to the present, albeit with incomes converging less rapidly than before. In Republican-world, meanwhile, pre-tax income increased 0.43 percent annually for the poor and lower-middle-class and 1.90 percent for the upper-middle-class and rich. Not only did the Great Divergence occur; it was more greatly divergent. Also of note: In Democrat-world pre-tax income increased faster than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all richer and more equal! But in Republican-world, pre-tax income increased slower than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all poorer and less equal! Democrats also produced marginally faster income growth than Republicans at the 95th percentile, but the difference wasn't statistically significant. (More on that in a future installment.)

What did Democrats do right? What did Republicans do wrong? Bartels doesn't know; in Unequal Democracy he writes that it would take "a small army of economists" to find out. But since these are pre-tax numbers, the difference would appear to be in macroeconomic policies. (Tne clue, Bartels suggests, is that Republicans always worry more than Democrats about

inflation.) Bartels' evidence is circumstantial rather than direct. But so is the evidence that smoking is a leading cause of lung cancer. We don't know exactly how tobacco causes the cells inside your lungs to turn cancerous, but the correlation is strong enough to convince virtually every public health official in the world.

Jacob Hacker and Paul Pierson, political scientists at Yale and Berkeley, respectively, take a slightly different tack. Like Bartels and Krugman, they believe that government action (and inaction) at the federal level played a leading role in creating the Great Divergence. But the culprit, they say, is not so much partisan politics (i.e., Republicans) as institutional changes in the

way Washington does business (i.e., lobbyists). "Of the billions of dollars now spent every year

According to Hacker and Pierson, industry began to mobilize in the early 1970s in response to liberalism's political ascendancy (which didn't end when Richard Nixon entered the White House in 1969):

The number of corporations with public affairs offices in Washington grew from 100 in 1968 to over 500 in 1978. In 1971, only 175 firms had registered lobbyists in Washington, but by 1982, 2,500 did. The number of corporate [political action committees] increased

from under 300 in 1976 to over 1,200 by the middle of 1980. […] The Chamber [of Commerce] doubled in membership between 1974 and 1980. Its budget tripled. The National Federation of Independent Business (NFIB) doubled its membership between

1970 and 1979.

examples and make arguments that are a little more speculative. We'll look at one such example in the next installment.

The resultant power shift, they argue, affects Democrats and Republicans like.Academics who believe that government policies are largely responsible for the Great Divergence don't breeze past the relevant mechanisms. Bartels writes at length about repeal of the estate tax, and the decline of the minimum wage; Hacker and Pierson about financial deregulation. But their approach to them is more impressionistic than comprehensive. They offer

Liberal politicians and activists have long argued that the federal government caused the Great Divergence. And by "federal government," they generally mean Republicans, who have controlled the White House for 20 of the past 30 years, after all. A few outliers even argue that for Republicans, creating income inequality was a conscious and deliberate policy goal.

Thursday, November 11, 2010

Most discussion about inequality in the United States focuses on race and gender. That makes

sense, because our society has a conspicuous history of treating blacks differently from whites

and women differently from men. Black/white and male/female inequality persist to this day.

The median annual income for women working full time is 23 percent lower than for their male

counterparts. The median annual income for black families is 38 percent lower than for their

white counterparts. The extent to which these imbalances involve lingering racism and sexism or

more complex matters of sociology and biology is a topic of much anguished and heated debate.

But we need not delve into that debate, because the Great Divergence can't be blamed on either

race or gender. To contribute to the growth in income inequality over the past three decades, the

income gaps between women and men, and between blacks and whites, would have to have

grown. They didn't.

The black/white gap in median family income has stagnated; it's a mere three percentage points

smaller today than it was in 1979.3 This lack of progress is dismaying. So is the apparent trend

that, during the current economic downturn, the black/white income gap widened somewhat. But

the black/white income gap can't be a contributing factor to the Great Divergence if it hasn't

grown over the past three decades. And even if it had grown, there would be a limit to how much

3

It is possible to argue that the black/white wage gap grew worse during the past three decades, for instance by factoring in blacks’ higher incarceration rate and lower participation in the job market. It has also been shown that, within income groups, blacks enjoyed less upward mobility during this period than whites. But the Great Divergence is a phenomenon that’s measured according to family (“household”) income, so in examining whether black/white income inequality contributed to it, I’ll consider only the 30-year change in black family income relative to white family income. And that change is nonexistent.

impact it could have on the national income-inequality trend, because African-Americans

constitute only 13 percent of the U.S. population.

Women constitute half the U.S. population, but they can't be causing the Great Divergence

because the male-female wage gap has shrunk by nearly half. Thirty years ago the median annual

income for women working full-time was not 23 percent less than men's, but 40 percent less.4

Most of these gains occurred in the 1980s and early 1990s; during the past five years they halted.

But there's every reason to believe the male-female income gap will continue to narrow in the

future, if only because in the U.S. women are now better educated than men. Ever since the late

1990s female students have outnumbered male students at colleges and universities. The femalemale

ratio is currently 57 to 43, and the U.S. Department of Education expects that disparity to

increase over the next decade.

Far from contributing to the Great Divergence, women have, to a remarkable degree, absented

themselves from it. Take a look at this bar graph by David Autor, an MIT labor economist:

The graph demonstrates that during the past three decades, women have outperformed men at all

education levels in the workforce. Both men and women have (in the aggregate) been moving

The trouble, Rose wrote, was that households varied greatly in composition and size. A

household might consist of a single young man just starting out on his own or an elderly widow

in retirement. Neither would likely enjoy a high income, but that would be a function of mere

circumstance (the young man was just beginning his climb up the greasy pole; the retired widow

no longer worked at all) and need (neither was likely to be responsible for any children). Another

problem, Rose suggested, was that some households were bigger than others. Couples tended to

have larger household incomes than single people, but that was because they likely collected two

paychecks rather than one. The proportion of Americans living alone had for various reasons

increased over time; that needed to be taken into account, too. Correcting for all these factors,

Rose calculated that median household income was 30 percent higher than the Census' official

figure (about $50,000 in 2007).

That was the good news. The bad news was that even with these new calculations, Rose couldn't

deny the existence of a Great Divergence. "Under all circumstances," he wrote, "inequality has

risen considerably, and this is a bad thing for America. Those at the bottom of the income ladder

have benefited only minimally from the significant gains in overall production over the past three

decades."

Back, then, to the drawing board. Conventional liberal and conservative explanations about what

ails society can neither explain the Great Divergence nor make it go away.

How many of you actually get this or understand? I have seen so many follow and believe ridiculous people and their stories. I cannot believe the majority of our nation could actually be so naive, I refuse to believe it.

Some people prefer to compare median weekly incomes because women are more likely to take time off over the course of the year, but weekly incomes followed a near-identical trend. Among part-time workers, women now enjoy a higher median weekly income than men. This is mainly because female part time workers tend to be older than male part-time workers.

A real wake up call to what has happened in our economy and with our money. It is all about The War of the classes.

The Great Divergence

By Timothy Noah

Part One: Introducing the Great Divergence

In 1915, a statistician at the University of Wisconsin named Willford I. King published The Wealth and Income of the People of the United States, the most comprehensive study of its kindto date. The United States was displacing Great Britain as the world's wealthiest nation, but detailed information about its economy was not yet readily available; the federal government wouldn't start collecting such data in any systematic way until the 1930s. One of King's purposeswas to reassure the public that all Americans were sharing in the country's newfound wealth.King was somewhat troubled to find that the richest 1 percent possessed about 15 percent of the nation's income. (A more authoritative subsequent calculation puts the figure slightly higher, atabout 18 percent.1)This was the era in which the accumulated wealth of America's richest families—the Rockefellers, the Vanderbilts, the Carnegies—helped prompt creation of the modern income tax, lest disparities in wealth turn the United States into a European-style aristocracy. The socialistmovement was at its historic peak, a wave of anarchist bombings was terrorizing the nation's industrialists, and President Woodrow Wilson's attorney general, Alexander Palmer, would soon stage brutal raids on radicals of every stripe. In American history, there has never been a timewhen class warfare seemed more imminent.That was when the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income. What caused this to happen?Over the next two weeks, I'll try to answer that question by looking at all potential explanations—race, gender, the computer revolution, immigration, trade, government policies, the decline of labor, compensation policies on Wall Street and in executive suites, and education.

Then I'll explain why people who say we don't need to worry about income inequality (there aren't many of them) are wrong.1 Sticklers will note that King was looking at the year 1910, whereas the later calculation, by economists Emmanuel Saez and Thomas Piketty, looks at 1913. The point is that King, who is almost entirelyforgotten by today’s leading economists, pretty much nailed it.Income inequality in the United States has not worsened steadily since 1915. It dropped a bit in the late teens, then started climbing again in the 1920s, reaching its peak just before the 1929crash. The trend then reversed itself. Incomes started to become more equal in the 1930s and then became dramatically more equal in the 1940s.2 Income distribution remained roughly stablethrough the postwar economic boom of the 1950s and 1960s. Economic historians Claudia Goldin and Robert Margo have termed this midcentury era the "Great Compression." The deepnostalgia for that period felt by the World War II generation—the era of Life magazine and the bowling league—reflects something more than mere sentimentality. Assuming you were white, not of draft age, and Christian, there probably was no better time to belong to America's middle class.

The Great Compression ended in the 1970s. Wages stagnated, inflation raged, and by the decade's end, income inequality had started to rise. Income inequality grew through the 1980s, slackened briefly at the end of the 1990s, and then resumed with a vengeance in the aughts. Inhis 2007 book The Conscience of a Liberal, the Nobel laureate, Princeton economist and New York Times columnist Paul Krugman labeled the post-1979 epoch the "Great Divergence."

It's generally understood that we live in a time of growing income inequality, but "the ordinary person is not really aware of how big it is," Krugman told me. During the late 1980s and the late1990s, the United States experienced two unprecedentedly long periods of sustained economic growth—the "seven fat years" and the " long boom." Yet from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent. Economic growth wasmore sluggish in the aughts, but the decade saw productivity increase by about 20 percent. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads.Here is a snapshot of income distribution during the past 100 years:2 During the 1930s the richest 1 percent’s share of the nation’s income dropped. Overall, the incomeequality trend of the Great Depression was somewhat equivocal. On the one hand, the rich lost income.On the other hand, middle-class incomes stagnated and a high level of unemployment (which peaked at 25 percent) hit those at the bottom of the income scale especially hard. I note all this to emphasize that itis neither necessary nor desirable to achieve equality through economic catastrophe.

﻿

Why don't Americans pay more attention to growing income disparity? One reason may be our enduring belief in social mobility. Economic inequality is less troubling if you live in a country where any child, no matter how humble his or her origins, can grow up to be president. In a

survey of 27 nations conducted from 1998 to 2001, the country where the highest proportion agreed with the statement "people are rewarded for intelligence and skill" was, of course, the United States (69 percent). But when it comes to real as opposed to imagined social mobility,

surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain—not to mention some newer nations like Canada and Australia—are all places where your chances of rising from the bottom are better

than they are in the land of Horatio Alger's Ragged Dick.

All my life I've heard Latin America described as a failed society (or collection of failed societies) because of its grotesque maldistribution of wealth. Peasants in rags beg for food

outside the high walls of opulent villas, and so on. But according to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is

more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is

starting to resemble a banana republic. The main difference is that the United States is big enough to maintain geographic distance between the villa-dweller and the beggar. As Ralston

In 1915, King wrote, "It is easy to find a man in almost any line of employment who is twice as efficient as another employee,

"but it is very rare to find one who is ten times as efficient. It is common, however, to see one man possessing not ten times but a thousand times the wealth of his neighbor. … Is the middle class doomed to extinction and shall we soon find the handful of plutocrats, the modern barons of wealth, lined up squarely in opposition to the propertyless masses with no buffer between to lessen the chances of open battle? With the middle class gone and the laborer condemned to remain a lifelong wage-earner with no hope of attaining wealth or even a competence in his old age, all the conditions are ripe for a crowning class-conflict equaling in intensity and bitterness anything pictured by the most radical follower of Karl Marx. Is this condition soon coming to pass? [emphasis his]

In the end, King concluded it wasn't. Income distribution in the United States, he found, was more equal than in Prussia, France, and the United Kingdom. King was no socialist. Redistributing income to the poor, he wrote, "would merely mean more rapid multiplication of

the lowest and least desirable classes," who remained, "from the reproductive standpoint, on the low point of their four-footed ancestors." A Malthusian, he believed in population control. Income inequality in the United States could be addressed by limiting immigration (King

deplored "low-standard alien invaders") and by discouraging excessive breeding among the poor ("eugenicists are just beginning to impress upon us the absurd folly of breeding great troops of paupers, defectives and criminals to be a burden upon organized society").

Today, incomes in the U.S. are more unequal than in Germany, France, and the United Kingdom, not less so. Eugenics (thankfully) has fallen out of fashion, and the immigration debate has

become (somewhat) more polite. As for income inequality, it's barely entered the national political debate. Indeed, the evidence from the 2000 and 2004 presidential elections suggests that even mild economic populism was a loser for Democrats.

But income inequality is a topic of huge importance to American society and therefore a subject of large and growing interest to a host of economists, political scientists, and other wonky types.

Except for a few Libertarian outliers (whose views we'll examine later), these experts agree that the country's growing income inequality is deeply worrying. Even Alan Greenspan, the former Federal Reserve Board chairman and onetime Ayn Rand acolyte, has registered concern. "This is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing," Greenspan said in 2005. Greenspan's Republican-appointed successor, Ben Bernanke, has also fretted about income inequality.

Yet few of these experts have much idea how to reverse the trend. That's because almost no one can agree about what's causing it. This week and next, I will detail and weigh the strengths and

weaknesses of various prominent theories as to what has brought about the income inequality boom of the last three decades. At the same time, I'll try to convey the magnitude of its effects on

American life. The Great Divergence may represent the most significant change in American society in your lifetime—and it's not a change for the better. Let's see if we can figure out what got us here.